Archive for April, 2010
36% “Small-Dollar Loan” Not Profitable For Banks…No Kidding
The FDIC small dollar loan pilot program was a development which was launched as a trial to determine the feasibility of banks offering a short term, small-dollar loan alternative at a 36% annual percentage rate. For many of us who are in the financial services industry, especially those who understand the costs and risks associated with offering small-dollar loans, the preliminary results were no surprise. The FDIC decided to change its focus of the program to observing and reporting how banks can successfully offer affordable small-dollar instead of assessing the profitability. If for-profit lenders are only able to gross $1. 38 for every $100 lent, there is absolutely no way the businesses would be able to stay afloat.
With the FDIC pilot program, there were a number of items and reporting which suggested that a full-fledged program wouldn’t be sustainable long-term in the banking environment. In addition, the program doesn’t seem to appeal to the same customer base as those of payday lenders. In the first year, participating banks originated 16,027 and nearly half of those loans were in amounts in excess of $1,000. The average amount of all loans made under $1,000 was still $659.42, which is about twice the average of loans made by traditional payday loan institutions. Another problem with the pilot program is that banks were pulling FICO scores to determine eligibility which is not a procedure commonly found within the payday loan industry, making it more difficult for individuals to qualify. One of the participating banks only approved 14% of the applications in the first two months of the program, denying 493 of the 574 received.
The preliminary results prompted the FDIC to encouraging the banks to use it as a relationship-building tool in which to suggest other products and services. The FDIC also considered the loans as part of the banks Community Reinvestment Act lending activities. In other words, the service will be used to help expand relationships and expand credit to low and moderate income neighborhoods but is not necessarily considered a profitable product.
Payday Loan Reform In Canada? How About Us?
We don’t all have to agree on every regulatory detail pertaining to short-term lending but can we at least agree that payday loans are such a popular product because there is a demand for them? Why are so many consumer advocates dead-set on eliminating the industry in its totality, especially without any solutions for a comparable replacement product? Time and resources would be better spent by coming up with legislation that will better meet lawmakers concerns as well as determining why so many Americans are finding themselves in a situation in which short-term credit is now a must-have.
After much debate and discussion, the Canadian Province of Ontario legitimized the payday loan product by coming up with terms that were both consumer friendly as well as profitable for businesses. Although there are some parts of the legislation that may not be preferable to lenders in the states, it should be noted that the guiding principles are to be desired and Canada has made huge strides in the right direction. The principles that aided in guiding the legislation include 1)providing access to credit that will provide reasonable consumer protections while allowing a viable market to exist 2)harmonization to ensure consistency in legislation 3)moving slowly and cautiously to be sure that reasonable measures are implemented and assessed and 4)clear objectives with a documented understanding on an issue before decisions are made.
The Canadian Payday Loan Association or CPLA touched on a number of other subjects pertaining to the industry. One of the subjects highlighted is the limitations placed on the amount of money advanced. In the States, many laws and regulations that take effect focus on limiting how much a borrower can obtain during a specific time frame and some states have even created databases for the purpose of keeping track of PDL activity. The CPLA see’s this as a declination of access to credit and suggests that the burden of risk is the lenders and not the borrowers if the loan isn’t paid. The CPLA goes on to say that no lender can afford to make loans that are not repaid and should therefore be capable of creating their own lending criteria.
See http://cpla-acps.ca/english/submissions/CPLA%20response%20to%20Ont%20consultation%20paper%20July%206%2020 07.pdf for the full paper.